1 Defendants’ Memorandum of Law in Support of Their Motion to Dismiss Complaint was filed January 5, 2009. Plaintiff’s Opposition to Defendants’ Motion to Dismiss Complaint Pursuant to F.R.Civ.P. 12(b)(6) and Memorandum of Law in Support Thereof was filed January 29, 2009. Defendants’ Reply Brief in Further Support of its Motion to Dismiss was filed March 17, 2009. Defendants’ motion to dismiss, brief and reply brief, and plaintiff’s opposition brief were each dismissed without prejudice to reinstate by my Order dated and filed September 29, 2009. Each document was reinstated on November 10, 2010 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA DELIA MCCOY-MCMAHON, ) ) Civil Action Plaintiff ) No. 08-cv-05989 ) vs. ) ) J. CARLTON GODLOVE, II, ) BRIAN R. KELLY, ) PATRICK M. MCCOY, ) LEWIS J. MCCOY, JR. and ) SPOTTS, STEVENS & MCCOY, ) ) Defendants ) APPEARANCES: JAY W. WALDMAN, ESQUIRE SUSAN K. QUIRITS, ESQUIRE ANDREA E. MERTZ, ESQUIRE On behalf of plaintiff STACEY A. SCRIVANI, ESQUIRE On behalf of defendants OPINION This matter is before the court on Defendants’ Motion to Dismiss Plaintiff’s Complaint Pursuant to F.R.Civ.P. 12(b)(6), which motion was filed on January 5, 2009. 1 For the following reasons, I grant defendants motion to dismiss with respect to Count XIV of plaintiff’s Complaint, which alleged that defendants violated the Racketeer Influenced and
47
Embed
BRIAN R. KELLY, ) PATRICK M. MCCOY, ) LEWIS J. … · SUSAN K. QUIRITS, ESQUIRE ANDREA E. MERTZ, ESQUIRE On behalf of plaintiff STACEY A. SCRIVANI, ESQUIRE ... Defendants J. …
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
1 Defendants’ Memorandum of Law in Support of Their Motion toDismiss Complaint was filed January 5, 2009. Plaintiff’s Opposition toDefendants’ Motion to Dismiss Complaint Pursuant to F.R.Civ.P. 12(b)(6) andMemorandum of Law in Support Thereof was filed January 29, 2009. Defendants’Reply Brief in Further Support of its Motion to Dismiss was filed March 17,2009.
Defendants’ motion to dismiss, brief and reply brief, andplaintiff’s opposition brief were each dismissed without prejudice toreinstate by my Order dated and filed September 29, 2009. Each document wasreinstated on November 10, 2010
IN THE UNITED STATES DISTRICT COURTFOR THE EASTERN DISTRICT OF PENNSYLVANIA
DELIA MCCOY-MCMAHON, )) Civil Action
Plaintiff ) No. 08-cv-05989)
vs. ))
J. CARLTON GODLOVE, II, )BRIAN R. KELLY, )PATRICK M. MCCOY, )LEWIS J. MCCOY, JR. and )SPOTTS, STEVENS & MCCOY, )
)Defendants )
APPEARANCES:JAY W. WALDMAN, ESQUIRESUSAN K. QUIRITS, ESQUIREANDREA E. MERTZ, ESQUIRE
On behalf of plaintiff
STACEY A. SCRIVANI, ESQUIREOn behalf of defendants
O P I N I O N
This matter is before the court on Defendants’ Motion
to Dismiss Plaintiff’s Complaint Pursuant to F.R.Civ.P. 12(b)(6),
which motion was filed on January 5, 2009. 1
For the following reasons, I grant defendants motion to
dismiss with respect to Count XIV of plaintiff’s Complaint, which
alleged that defendants violated the Racketeer Influenced and
2 18 U.S.C. §§ 1961 through 1968.
-2-
Corrupt Organizations Act (“RICO”).2 Specifically, I conclude
that plaintiff has failed to allege a pattern of racketeering
activity and has not alleged an injury to her business or
property, as required by RICO. Moreover, I conclude that an
amendment to plaintiff’s Complaint would be futile because
plaintiff’s proposed amendments would not establish that
defendants proximately caused an injury to plaintiff’s business
or property.
Furthermore, I dismiss the remainder of plaintiff’s
Complaint, which alleges thirteen pendant state-law claims, for
lack of subject matter jurisdiction. Plaintiff has not
established diversity jurisdiction, and I conclude that
plaintiff’s state-law claims predominate over plaintiff’s sole
federal claim, which I have dismissed.
Accordingly, I dismiss the remaining portion of
defendants’ motion to dismiss plaintiff’s state-law claims as
moot without prejudice to raise the issues as preliminary
objections in state court.
COMPLAINT
This case arises from the corporate governance and
merger of defendant Spotts, Stevens and McCoy, Inc. (“SSM”), a
Pennsylvania business corporation, which merged into a special
Defendants J. Carlton Godlove, Brian Kelly, Patrick McCoy and
3 Plaintiff seeks to bring this lawsuit individually as ashareholder and derivatively on behalf of SSM. See Complaint at paragraphs 1,2. Plaintiff brings Count I, II, III, IV, VII, VIII, IX, XI, XII, and XIIIindividually and derivatively. Count V, VI and XIV are brought individually.
4 18 U.S.C. §§ 1961 through 1968.
-3-
Lewis McCoy (collectively “individual defendants”) were directors
of SSM and collectively owned 89% of SSM common stock.
Plaintiff Delia McCoy-McMahon was a minority
shareholder of SSM before she was “squeezed out” in this merger.
Plaintiff contends that the “Freeze-Out Merger” had an improper
purpose, used an unfair process, and squeezed plaintiff out at an
unfair price.
Plaintiff also alleges the individual defendants, in
their capacity as directors of SSM, breached their fiduciary duty
owed to shareholders and the corporation 3 and, in their capacity
as controlling shareholders, breached their fiduciary duty owed
to minority shareholders.
In total, plaintiff asserts fourteen causes of action
for breach of fiduciary duties, fraud, breach of contract,
violations of Pennsylvania securities laws, unjust enrichment,
and violations of RICO.4 The first thirteen claims are brought
pursuant to Pennsylvania state law. Count XIV for violation of
RICO is a federal law claim.
In Count I, plaintiff claims that the individual
defendants breached a fiduciary duty by setting and securing
excessive compensation for their roles as directors of Spotts,
Stevens and McCoy, Inc. Count II alleges that the individual
5 Act of December 5, 1972, P.L. 1280, No. 284, § 401, 70 P.S. § 1-401.
-4-
defendants engaged in corporate waste, and mismanaged corporate
assets. Count III avers that the individual defendants
misappropriated a corporate opportunity. Specifically, plaintiff
alleges that the individual defendants capitalized on a
profitable real estate venture for their own pecuniary benefit at
the expense of SSM.
Count IV claims that the individual defendants, in
their capacity as controlling shareholders, breached their
fiduciary duties to the minority shareholders, including
plaintiff, by withholding pertinent information about the
corporation in order to exercise unfettered control of corporate
decisions.
Count V, asserts that the individual defendants
breached their fiduciary duty by implementing the Freeze-Out
Merger, which plaintiff alleges had no business justification and
was entered into in order to circumvent direct and derivative
liability to plaintiff. Further, plaintiff alleges that the
merger was not authorized by a majority of uninterested directors
and that the consideration paid to minority shareholders for
their stock did not represent its fair value.
Count VI states a claim that the individual defendants
violated the Pennsylvania Securities Act of 1972. 5 Specifically,
plaintiff contends that the materials provided by the individual
defendants to minority shareholders regarding the merger
-5-
contained untrue statements of material fact about the true value
of SSM stock.
Count VII asserts a claim for fraud. Count VIII is a
claim for intentional misrepresentation, and Count IX alleges
negligent misrepresentation.
Count X alleges a cause of action for breach of
fiduciary duty, based on the individual defendants failure to
disclose material information about SSM and the potential or
actual conflicts of interests of the individual defendants.
Count XI alleges that the failure of the individual defendants to
perform their duties as directors of SSM breached their employ-
ment contract with SSM.
Count XII is a claim for unjust enrichment against the
individual defendants for profits they realized in violation of
their fiduciary duties. Count XIII alleges that the individual
defendants collectively conspired to engage in the unlawful acts
plaintiff contends that defendants’ conduct, described in
Counts I through XIII, violated 18 U.S.C. §§ 1341, 1343, 1344 and
157, which establish liability based on mail fraud, wire fraud,
bank fraud, and bankruptcy fraud, respectively.
JURISDICTION
Jurisdiction in this case is based on federal question
jurisdiction pursuant to 28 U.S.C. § 1331. This court has
6 Plaintiff contends that defendants challenge to plaintiff’sstanding to litigate 11 of her 14 claims should have been brought pursuant toFed.R.Civ.P. 12(b)(1), which contests subject matter jurisdiction instead ofRule (12)(b)(6), which is based on the failure to state a claim.
Plaintiff confuses the doctrine of constitutional standing, whichis jurisdictional, with the doctrines of derivative standing and standingunder RICO, which are evaluated on the adequacy of the pleadings. “A motionto dismiss under Rule 12(b)(6) for lack of RICO standing is distinct from amotion to dismiss under Rule 12(b)(1) for lack of constitutional standing.”Walter v. Palisades Collection LLC., 480 F.Supp.2d 797, 804, n.10 (E.D.Pa.2007) (Robreno, J.) (internal citations omitted).
(Footnote 6 continued):
-6-
supplemental jurisdiction over plaintiff’s pendent state-law
claims. See 28 U.S.C. § 1367.
VENUE
Venue is proper pursuant to 28 U.S.C. § 1391(b) because
the events giving rise to plaintiff’s claims allegedly occurred
within Berks County, Pennsylvania, which is located within this
judicial district.
STANDARD OF REVIEW
A claim may be dismissed under Federal Rule of Civil
Procedure 12(b)(6) for "failure to state a claim upon which
relief can be granted."6 Fed.R.Civ.P. 12(b)(6). A Rule 12(b)(6)
(Continuation of footnote 6):
RICO standing requirements are viewed as questions regarding theadequacy of the pleadings, rather than as questions of subject matterjurisdiction. Id.; see also Gradeless v. American Mutual Share InsuranceCorporation, 2011 U.S.Dist. LEXIS 31877 at *12, n.2 (S.D.In. March 23, 2011)holding that direct and derivative standing is a distinct concept from ArticleIII standing.
Therefore, because defendants’ motion to dismiss challengesplaintiff’s standing to bring a RICO claim and a derivative suit, I willanalyze defendant’s motion to dismiss under Federal Rule of Civil Procedure12(b)(6).
-7-
motion requires the court to examine the sufficiency of the
complaint. Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 102,
2 L.Ed.2d 80, 84 (1957) (abrogated in other respects by
Bell Atlantic Corporation v. Twombly, 550 U.S. 544,
127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
Generally, in ruling on a motion to dismiss, the court
relies on the complaint, attached exhibits, and matters of public
record, including other judicial proceedings. Sands v.
McCormick, 502 F.3d 263, 268 (3d Cir. 2008).
Except as provided in Federal Rule of Civil
Procedure 9, a complaint is sufficient if it complies with
Rule 8(a)(2), which requires "a short and plain statement of the
claim showing that the pleader is entitled to relief."
Fed.R.Civ.P. 8(a)(2). Rule 8(a)(2) “[does] not require
heightened fact pleading of specifics, but only enough facts to
state a claim to relief that is plausible on its face.” Twombly,
7 The Supreme Court’s Opinion in Ashcroft v. Iqbal, __U.S. __, __,129 S.Ct. 1937, 1953, 173 L.Ed.2d 868, 887 (2009), states clearly that the“facial plausibility” pleading standard set forth in Twombly applies to allcivil suits in the federal courts. Fowler v. UPMC Shadyside, 578 F.3d 203,210 (3d Cir. 2009). This showing of facial plausibility then “allows thecourt to draw the reasonable inference that the defendant is liable for themisconduct alleged,” and that the plaintiff is entitled to relief. Fowler,578 F.3d at 210 (quoting Iqbal, __ U.S. at __, 129 S.Ct. at 1949,173 L.Ed.2d at 884). As the Supreme Court explained in Iqbal, “[t]heplausibility standard is not akin to a ‘probability requirement,’ but it asksfor more than a sheer possibility that the defendant acted unlawfully.”Iqbal, __ U.S. at __, 129 S.Ct. at 1949, 173 L.Ed.2d at 884.
-8-
550 U.S. at 570, 127 S.Ct. at 1974, 167 L.Ed.2d at 949.7
In determining whether a plaintiff’s complaint is
sufficient, the court must “accept all factual allegations as
true, construe the complaint in the light most favorable to the
plaintiff, and determine whether, under any reasonable reading,
the plaintiff may be entitled to relief.” Fowler,
578 F.3d at 210 (quoting Phillips v. County of Allegheny, 515
F.3d 224, 233 (3d Cir. 2008)).
Although “conclusory or ‘bare-bones’ allegations will
[not] survive a motion to dismiss,” Fowler, 578 F.3d at 210, “a
complaint may not be dismissed merely because it appears unlikely
that the plaintiff can prove those facts or will ultimately
prevail on the merits.” Phillips, 515 F.3d at 231. Nonetheless,
to survive a 12(b)(6) motion, the complaint must provide “enough
facts to raise a reasonable expectation that discovery will
reveal evidence of the necessary element[s].” Id. (quoting
Twombly, 550 U.S. at 556, 127 S.Ct. at 1965, 167 L.Ed.2d at 940)
(internal quotation omitted).
-9-
The court is required to conduct a two-part analysis
when considering a Rule 12(b)(6) motion. First, the factual
matters averred in the complaint, and any attached exhibits,
should be separated from legal conclusions asserted therein.
Fowler, 578 F.3d at 210. Any facts pled must be taken as true,
and any legal conclusions asserted may be disregarded.
Id. at 210-211.
Second, the court must determine whether those factual
matters averred are sufficient to show that the plaintiff has a
“plausible claim for relief.” Id. at 211 (quoting Iqbal,
__ U.S. at __, 129 S.Ct. at 1950, 178 L.Ed.2d at 884).
Ultimately, this two-part analysis is “context-
specific” and requires the court to draw on “its judicial
experience and common sense” to determine if the facts pled in
the complaint have “nudged [plaintiff’s] claims” over the line
from “[merely] conceivable [or possible] to plausible.” Iqbal,
__ U.S. at __, 129 S.Ct. at 1950-1951, 178 L.Ed.2d at 884-885
(internal quotations omitted).
A well-pleaded complaint may not be dismissed simply
because “it strikes a savvy judge that actual proof of those
facts is improbable, and that a recovery is very remote and
unlikely.” Twombly, 550 U.S. at 556, 127 S.Ct. at 1965,
167 L.Ed.2d at 940-941.
8 Complaint, ¶¶ 13 and 14.
9 Complaint, ¶ 16.
10 Complaint, ¶¶ 47 and 48.
11 Complaint, ¶¶ 31 and 32.
12 Complaint, ¶ 33.
-10-
FACTS
Based upon the allegations in plaintiff’s Complaint,
which under the foregoing standard of review I must accept as
true for purposes of defendants’ motion to dismiss, the pertinent
facts are as follows.
In 1993, after a series of corporate reorganizations
and mergers not relevant to this action, Spotts, Stevens and
McCoy (“SSM”) was formed.8 Plaintiff acquired 13,693 shares of
SSM stock.9
On September 12, 1996, the entire Board of Directors
for SSM resigned, and the then-president’s employment was
terminated, and the individual defendants, J. Carlton
Godlove, II, Brian R. Kelly, Patrick M. McCory and Lewis J.
McCoy, Jr. were elected to replace the Board. 10
Also on September 12, 1996, plaintiff entered into a
shareholder agreement with the individual defendants, which
granted the individual defendants the right to vote all of their
respective shares.11 The shares subject to the shareholder
agreement composed 95.81% of the total outstanding shares of SSM
common stock.12 By March 27, 1998, the four individual
defendants, J. Carlton Godlove, II, Brian R. Kelly, Patrick M.
plaintiff repeatedly did not receive notification of annual
shareholder meetings and the individual defendants did not
furnish SSM’s financial statements and balance sheets to
shareholders.20
On June 9, 2000, the individual defendants mailed a
letter to SSM shareholders setting forth a tender offer, which
expired after 5 days. The tender was an offer to purchase all of
the outstanding shares of SSM.21 This “Buyback Letter” offered
$5.16 per share based on a calculation of share value as set
forth in the shareholder agreement.22
According to the Buyback Letter, SSM did not have any
plans that would materially affect the value of SSM stock.
Additionally, the Buyback Letter indicated that SSM planned to
continue to reinvest into the business for corporate purposes
such as updating technology, hiring and compensating talented
employees, expanding SSM’s office, and paying down debt. 23
However, contrary to the plans identified by the
Buyback Letter, corporate profits were used to fund bonus pools
for the individual defendants.24 Additionally, the individual
25 Complaint, ¶¶ 171-173.
26 Complaint, ¶ 175.
27 Complaint, ¶¶ 176 and 178.
28 Complaint, ¶ 181.
29 Complaint, ¶ 179.
30 Complaint, ¶ 268.
-13-
defendants possessed insider information about the value of SSM,
and the offer of $5.16 per share was undervalued. 25
On June 10, 2000, plaintiff called defendant Kelly with
questions about the Buyback Letter.26 Mr. Kelly told plaintiff
that the individual defendants had plans to sell the corporation
and that he would not let the corporation be sold for anything
less than $40-$50 per share. He also said the individual
defendants were were hopeful of obtaining an offer for $90-$100
per share because they “were thinking big.” 27
Twenty-four shareholders, totaling more than 20,000
shares of SSM stock, sold their shares pursuant to the terms of
the Buyback Letter.28 The price of SSM stock six weeks after the
Buyback Letter was sent rose to $5.90 per share, costing the
shareholders who sold their stock more than $14,600. 29
Plaintiff, however, did not sell her shares.
On June 6, 2003, the individual defendants formed a
partnership called Uniquad Management Group, L.P. (“Uniquad”).
The only limited partners of Uniquad were the individual
defendants.30
On June 24, 2003, Uniquad purchased property at 1047
31 Complaint, ¶¶ 270 and 271.
32 Complaint, ¶¶ 272 and 273.
33 Complaint, ¶ 274.
34 Complaint, ¶ 280.
35 Complaint, ¶ 275.
36 Complaint, ¶¶ 277, Exhibit T.
-14-
North Park Road, in Wyomissing, Berks County, Pennsylvania to
serve as SSM’s new headquarters for more than $2.5 million. The
North Park Road property was 100% financed. 31
SSM, as directed by the individual defendants, agreed
to guarantee the $2.5 million debt without obtaining any
consideration or collateral from Uniquad. 32 SSM’s guarantee of
the Uniquad debt was not noted in minutes recorded at SSM board
meetings and the individual defendants did not obtain approval
from the shareholders to guarantee the debt. 33
Currently, SSM pays a monthly rent of $35,833 per month
to Uniquad for the property.34
Despite Uniquad making the purchase, and SSM merely
guaranteeing the debt and providing rental payments, on June 24,
2003, the individual defendants published a press release,
revealing that SSM purchased the North Park Road property. 35
Based on the “Press Release,” plaintiff assumed that the property
was an SSM asset.36
Following the purchase of the new headquarters, SSM
financed the furnishing of an $80,000 “Taj Mahalic” office for
37 Complaint, ¶¶ 278 and 279.
38 Complaint, ¶ 280.
39 15 Pa.C.S.A. § 1508.
40 Complaint, ¶ 186.
41 Complaint, ¶ 188.
42 Complaint, ¶¶ 188-193.
-15-
defendant Godlove.37 In total, SSM spent $600,000 furnishing the
new headquarters, none of which was approved by a formal vote by
the individual defenants as directors of SSM, the shareholders,
or noted in the minutes at SSM board meetings. 38
On July 5, 2006, plaintiff sent the individual
defendants and SSM a verified request for inspection and
examination of its corporate books pursuant to § 1508 39 of the
Pennsylvania Business Corporations Law (“BCL”). 40 SSM
conditioned plaintiff’s inspection of corporate records on
plaintiff signing a confidentiality agreement presented by the
individual defendants. The confidentiality agreement would have
required plaintiff to waive certain statutory rights granted by
the BCL.41
A dispute over the terms of the confidentiality
agreement ensued, and on August 8, 2006, plaintiff filed a
Petition to Compel Inspection of Corporate Records in the Court
of Common Pleas of Berks County, Pennsylvania in case number
06-9043.42
Based on an agreement between plaintiff, the individual
defendants, and SSM, on September 19, 2006, plaintiff withdrew,
43 Complaint, ¶¶ 194 and 195.
44 Complaint, ¶¶ 197-199.
45 Complaint, ¶¶ 200 and 201.
46 Complaint, ¶ 208.
47 Complaint, ¶ 209.
48 Complaint, ¶ 210
49 Complaint, ¶ 211.
-16-
without prejudice to refile, her petition to compel inspection. 43
Despite having reached an agreement requiring the defendants to
turn over corporate books and records by October 17, 2006,
defendants failed to comply until sixteen days beyond the
deadline.44 Even the documents which were turned over late by
defendants were incomplete, and plaintiff sent defendants a
second verified request for inspection of corporate documents. 45
Defendants attempted to bring an action for declaratory
judgment pertaining to plaintiff’s request for records in the
Court of Common Pleas of Berks County, Pennsylvania in case
number 06-9043.46 Defendants’ filings were returned because the
docket number 06-9043 had become inactive. 47
Defendants then filed a new motion in Berks County
Court for declaratory judgment in case number 07-2865. 48
Plaintiff re-filed her petition to compel inspection in case
number 06-9043 and a motion to consolidate all the pending Berks
County actions involving the parties. 49
On December 26, 2007, plaintiff’s request to inspect
SSM’s corporate books was granted by Order issued in state
50 Complaint, ¶ 217.
51 Complaint, ¶¶ 221, 224 and 225.
52 Complaint, ¶ 229.
53 Complaint, ¶ 237.
54 Complaint, ¶ 237.
55 Complaint, ¶¶ 244 and 246-252.
-17-
court.50 Defendants failed to immediately comply with the court
Order, despite multiple requests from plaintiff. When SSM
documents were eventually turned over in January 2008, they were
deficient.51
In response to defendants’ deficient disclosure,
plaintiff filed a motion to reveal confidential information in
Berks County Court on March 6, 2008.52 On May 19, 2008,
following a court hearing on plaintiff’s motion to reveal
confidential information, plaintiffs and defendants agreed that
plaintiff would file a complaint under seal, but that plaintiff
would be able to communicate with shareholders by letter
concerning averments made in the complaint. 53 Accordingly,
defendants were to provide plaintiff with SSM’s shareholder list
and stock ledger.54
Despite this agreement, defendants stalled in drafting
a letter to shareholders pertaining to plaintiff’s complaint, and
the shareholder ledger provided to plaintiff was incomplete based
on a comparison with a list provided to plaintiff at the 2007
annual stockholder meeting.55
In addition to failing to provide plaintiff with the
56 Complaint, ¶ 289.
57 Complaint, ¶¶ 291-307.
58 Complaint, ¶¶ 313 and 317.
59 Complaint, ¶¶ 316 and 335.
60 Complaint, ¶¶ 312 and 322.
-18-
requested corporate information, the individual defendants also
failed to disclose to shareholders the existence of pending
litigation against SSM.56 Specifically, not including the
present action, SSM is a defendant in four lawsuits (three
federal actions in the United States District Court for the
Eastern District of Pennsylvania and one state action in the
Court of Common Pleas of Berks County, Pennsylvania, which were
initiated between 2005 and 2008.57
On October 24, 2008 SSM merged with WHI, a special
purpose corporation, whose board was composed entirely of the
individual defendants.58 WHI was formed for the sole purpose of
holding the individual defendants’ shares of SSM stock and
freezing plaintiff out of her shares. Because of the “Freeze-Out
Merger,” the individual defendants and their spouses obtained
control of 100% of the remaining shares of SSM stock. 59
The Freeze-Out Merger was not submitted to shareholders
for approval despite provisions within SSM’s bylaws which provide
that contracts or transactions between SSM and another
corporation in which directors have a conflict of interest
require disclosure and approval by a majority of disinterested
directors or shareholders.60
61 Complaint, ¶ 311.
62 Complaint, ¶¶ 311 and 334.
63 Complaint, ¶ 459.
64 Complaint, ¶ 459.
65 Complaint, ¶ 342.
66 Complaint, ¶ 345.
-19-
Plaintiff received a letter from defendant Godlove on
October 27, 2008 informing her that the corporation had been
involved in a merger with WHI.61 In a packet of merger-related
materials, plaintiff also received a copy of the merger
agreement, and a fair value analysis and valuation of SSM stock,
which was designated at $11.03 per share. 62
The “Freeze-Out Merger Materials” contained numerous
untrue statements pertaining to the valuation of SSM stock.
Specifically, the financial statements did not account that the
individual defendants’ compensation was determined to be
excessive by a human resources consulting firm retained by SSM. 63
Additionally, the calculation of merger consideration
did not account for the likelihood of SSM recovering damages from
plaintiff’s forthcoming lawsuit, which plaintiff planned to bring
derivatively on behalf of SSM against the individual
defendants.64
On September 9, 2008, plaintiff formally demanded in
writing that the SSM board initiate a lawsuit against the board
of directors.65 On October 8, 2008, the defendants rejected
plaintiff’s demand.66 On November 25, 2008, plaintiff filed the
-20-
instant lawsuit in the Court of Common Pleas of Berks County,
Pennsylvania. On December 26, 2008, defendants filed a Notice of
Removal on the grounds that the Complaint raised a substantial
issue of federal law under 18 U.S.C. § 1331.
DISCUSSION
Of the fourteen claims brought by plaintiff, only Count
XIV presents a federal question. Count XIV asserts liability
under RICO. The first thirteen counts of plaintiff’s Complaint
are all state law causes of action for breach of fiduciary
duties, breach of contract, or violations of Pennsylvania
securities laws.
For the reasons set forth below, I conclude that
plaintiff fails to state a claim upon which relief can be granted
under RICO and therefore I grant defendants’ motion to dismiss
Count XIV. Consequently, the Complaint fails to state a federal
cause of action. Without a federal question before the court, I
elect to dismiss plaintiff’s remaining claims, without prejudice,
for lack of subject matter jurisdiction.
Racketeer Influenced and Corrupt Organizations Act (“RICO”)
Plaintiff’s federal claim alleges that the individual
defendants violated 18 U.S.C. § 1962(c) of the Racketeer
Influenced and Corrupt Organizations Act (“RICO”).
Title 18 of United States Code Section 1962(c) provides
that it is “unlawful for any person employed by or associated
with any enterprise engaged in, or the activities of which
affect, interstate or foreign commerce, to conduct or
-21-
participate, directly or indirectly, in the conduct of such
enterprise’s affairs through a pattern of racketeering
activity....” 18 U.S.C. § 1962(c). “Any person injured in his
business or property by reason of a violation of section 1962 of
this chapter may sue therefor in any appropriate United States
district court....” 18 U.S.C. § 1964.
To establish a RICO claim, a plaintiff must show
“(1) the existence of a RICO enterprise; (2) the existence of a
pattern of racketeering activity; (3) a nexus between the
defendant, the pattern of racketeering activity or the RICO
enterprise; and (4) resulting injury to the plaintiff’s business
or property.” Smith v. Jones, Gregg, Creehan & Gerace, LLC.,
2008 U.S.Dist LEXIS 98530 at *4 (W.D.Pa. Dec. 5, 2008).
Enterprise
A RICO enterprise is broadly defined as “any
individual, partnership, corporation, association or other legal
entity, and any union or group of individuals associated in fact
although not a legal entity.” 18 U.S.C. § 1961(4).
SSM qualifies as an enterprise within the meaning of
RICO. SSM provides engineering services to customers and clients
in other states. Morever, the individual defendants, as
directors of SSM, are employed and associated with the
enterprise.
67 Title 18 U.S.C. Section 1341 provides in pertinent part:
§ 1341 Frauds and swindles
Whoever, having devised or intending to devise any scheme orartifice to defraud, or for obtaining money or property bymeans of false or fraudulent pretenses, representations, or promises, or to sell, dispose of, loan, exchange, alter,give away, distribute, supply, or furnish or procure forunlawful use any counterfeit or spurious coin, obligation,security, or other article, or anything represented to be orintimated or held out to be such counterfeit or spuriousarticle, for the purpose of executing such scheme orartifice or attempting so to do, places in any post officeor authorized depository for mail matter, any matter orthing whatever to be sent or delivered by the PostalService, or deposits or causes to be deposited any matter orthing whatever to be sent or delivered by any private orcommercial interstate carrier, or takes or receivestherefrom, any such matter or thing, or knowingly causes tobe delivered by mail or such carrier according to thedirection thereon, or at the place at which it is directedto be delivered by the person to whom it is addressed, anysuch matter or thing, shall be fined under this title orimprisoned not more than 20 years, or both....
68 Title 18 U.S.C. Section 1343 provides in pertinent part:
§ 1343 Fraud by wire, radio, or television
Whoever, having devised or intending to devise any scheme orartifice to defraud, or for obtaining money or property bymeans of false or fraudulent pretenses, representations, orpromises, transmits or causes to be transmitted by means ofwire, radio, or television communication in interstate orforeign commerce, any writings, signs, signals, pictures, orsounds for the purpose of executing such scheme or artifice,shall be fined under this title or imprisoned not more than20 years, or both....
-22-
Racketeering Activity
Title 18 of United States Code Section 1961(1)
proscribes the criminal offenses that qualify as predicate acts
of “racketeering activity” for the purpose of establishing RICO
liability. Plaintiff alleges that the individual defendants,
engaged in schemes to defraud plaintiff and SSM, as described in
Counts I through XIII of the Complaint. Plaintiff alleges that,
in doing so, they committed mail fraud, wire fraud, bank fraud,
and bankruptcy fraud in violation of 18 U.S.C. §§ 1341 67, 134368,
69 Title 18 U.S.C. Section 1344.
§ 1344 Bank Fraud
Whoever knowingly executes, or attempts to execute, a schemeor artifice--(1) to defraud a financial institution; or (2)to obtain any of the moneys, funds, credits, assets,securities, or other property owned by, or under the custody or control of, a financial institution, by means of false orfraudulent pretenses, representations, or promises; shall befined not more than $ 1,000,000 or imprisoned not more than30 years, or both.
70 Title 18 U.S.C. Section 157.
§ 157 Bankruptcy fraud
A person who, having devised or intending to devise a schemeor artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so-(1) files a petition under title 11, including a fraudulentinvoluntary petition under section 303 of such; (2) files adocument in a proceeding under title 11; or (3) makes afalse or fraudulent representation, claim, or promiseconcerning or in relation to a proceeding under title 11, atany time before or after the filing of the petition, or inrelation to a proceeding falsely asserted to be pendingunder such title, shall be fined under this title,imprisoned not more than 5 years, or both.
71 Complaint, ¶ 600.
-23-
134469 and 15770, respectively.71
Mail fraud, wire fraud, bank fraud and bankruptcy fraud
all constitute predicate acts of racketeering activity under
18 U.S.C. § 1961(1).
Allegations sounding in fraud as the basis for
establishing predicate acts of racketeering activity under RICO,
must comply with the heightened pleading requirements of Federal
Rule of Civil Procedure 9(b). Warden v. McClelland,
Here, the state law claims substantially predominate
over the federal claim, which has been dismissed. I conclude
exercising supplemental jurisdiction over the state law claims is
not warranted. Accordingly, I remand this matter back to the
Court of Common Pleas of Berks County, Pennsylvania.
CONCLUSION
For the foregoing reasons, I grant defendants’ motion
to dismiss plaintiff’s RICO claim, with prejudice, and dismiss
the remainder of plaintiff’s Complaint for lack of subject matter
jurisdiction, without prejudice to raise the issues contained in
the within motion to dismiss regarding plaintiff’s remaining
state law claims as preliminary objections in state court.
88 Defendants’ motion to dismiss, brief and reply brief, andplaintiff’s opposition brief were each dismissed without prejudice toreinstate by my Order dated and filed September 29, 2009. Each document wasreinstated on November 10, 2010.
-45-
IN THE UNITED STATES DISTRICT COURTFOR THE EASTERN DISTRICT OF PENNSYLVANIA
DELIA MCCOY-MCMAHON, )) Civil Action
Plaintiff ) No. 08-cv-05989)
vs. ))
J. CARLTON GODLOVE, II, )BRIAN R. KELLY, )PATRICK M. MCCOY, )LEWIS J. MCCOY, JR. and )SPOTTS, STEVENS & MCCOY, )
)Defendants )
O R D E R
Now, this 30th Day of September, 2011, upon
consideration of the following documents:
(1) Defendants’ Motion to Dismiss ComplaintPursuant to F.R.Civ.P. 12(b)(6), which motionwas filed on January 5, 2009;
(2) Defendants’ Memorandum of Law in Support ofTheir Motion to Dismiss Complaint, whichbrief was filed on January 5, 2009;
(3) Plaintiff’s Opposition to Defendants’ Motionto Dismiss Complaint Pursuant to F.R.Civ.P.12(b)(6) and Memorandum of Law in SupportThereof, which opposition brief was filed onJanuary 26, 2009; and
(4) Defendants’ Reply Brief in Further Support ofits Motion to Dismiss, which reply brief wasfiled on March 17, 2009;88
and for the reasons expressed in the accompanying Opinion,
-xlvi-
IT IS ORDERED that Defendants’ Motion to Dismiss
Complaint Pursuant to F.R.Civ.P. 12(b)(6) is granted in part and
dismissed in part.
IT IS FURTHER ORDERED that the motion is granted to the
extent it seeks dismissal of Count XIV of plaintiff’s Complaint
alleging violations of the Racketeer Influenced and Corrupt
Organizations Act (“RICO”).
IT IS FURTHER ORDERED that the remainder of plaintiff’s
Complaint is dismissed for lack of subject matter jurisdiction,
without prejudice to reinstate the issues contained in the motion
to dismiss regarding plaintiff’s pendant state-law claims as
preliminary objections in the Court of Common Pleas of Berks
County, Pennsylvania.
IT IS FURTHER ORDERED that the defendants’ motion to
dismiss is dismissed as moot to the extent it seeks dismissal of
Counts I through XIII of plaintiff’s Complaint.
IT IS FURTHER ORDERED that this matter is remanded to
the Court of Common Pleas of Berks County, Pennsylvania for
disposition of the remainder of plaintiff’s claims.
IT IS FURTHER ORDERED that the Clerk of Court shall